Climate Change: the Private Sector at the Barricades

I am not a naturally pessimist person (despite the title of my blog). But when it comes to climate change, I often have a sense that mankind is sleep-walking toward a holocaust of its own making. Any optimism? Well, at the risk of clutching at straws, I am heartened by the fact that elements of the private sector have joined the fray.

So we see this call to arms, for example, in Pricewaterhouse Coopers (PWC)’s most recent Low Carbon Economy Index (LCEI) report entitled “Two late for 2 degrees?” which came out in November 2012:

Business leaders have been asking for clarity in political ambition on climate change. Now one thing is clear: businesses, governments and communities across the world need to plan for a warming world – not just 2°C, but 4°C, or even 6°C.

The vast majority of my career has been spent in the private sector: a resume peppered with representatives of capitalism red in tooth and claw: Dun & Bradstreet, Sumitomo Bank, Nomura Securities, Deutsche Bank and Henderson/Gartmore Asset Management.

For the employees of this type of global company, climate change rarely penetrates the consciousness. Major daily concerns revolve around such subjects as relationship management of colleagues and clients, the meeting of targets (whether quantitative or qualitative), career progression (or job security), and remuneration (salary and bonus). I stress, there is nothing strange or unwholesome in this.

But behind this day-to-day life in the office cubicle is the assumption that the world a few decades out will look much as it does now. We do what we do now because we don’t expect that our world will be turned upside down in the future. A life pathway is envisaged that probably involves some combination of house, holidays, the launching of children up education runways and perhaps a personal achievement or two (maybe a marathon, a furniture-making course or a postgrad degree).

Looked at another way, employees of multinational companies generally see the future for themselves and their children unfolding at the top of Maslow’s hierarchy of needs:

And then along comes climate change—the truly unwelcome guest at the feast—accompanied by shrill messages from the scientific community, such as this from Lonnie Thompson, one of the world’s foremost experts on snow and ice (here):

Climatologists, like other scientists, tend to be a stolid group. We are not given to theatrical rantings about falling skies. Most of us are far more comfortable in our laboratories or gathering data in the field than we are giving interviews to journalists or speaking before Congressional committees. Why then are climatologists speaking out about the dangers of global warming? The answer is that virtually all of us are now convinced that global warming poses a clear and present danger to civilization.

This is troubling. Indeed, a direct challenge to the perceived life story of the average multinational expat as he or she wanders around the world. In the language of psychology, a dissonance is created: a sense of discomfort over what is expected of one’s life (and one’s children’s lives) and what the scientific community is offering in contrast and opposition to this expectation.

So what to do? The classic response is to downplay one of the dissonant elements. In this particular case pick and mix between 1) climate change doesn’t exist, 2) it exists but is a natural phenomenon, and 3) it is taking place but it at such a slow rate as to be irrelevant to my and my children’s life paths.

Behind this hangs the opportunity to seek additional information. But, strangely, while more information may inform one better of the risks, it comes with a cost. The abandonment of the original ingrained belief could be a painful affair. The extra piece of information may reduce dissonance by persuading oneself that climate change does not present a threat to a way of life; or it may may increase dissonance by telling you that the life you believe you are building for you and your children is a fragile affair. There is a large asymmetry here. Are you receptive to facts that buttress your view of the world as a source of pleasure or facts that contradict that view and produce cognitive pain.

But ring-fencing oneself from opposing facts is becoming increasingly difficult. As time has gone by, awareness of the climate change threat has been trickling out of academia into the wider world. It has become a preoccupation of military establishments (see, for example, here). More recently, multilateral organisations like the International Energy Agency (IEA, here) and the World Bank (here) have decided to directly flag the climate change threat.

Nonetheless, for your average expat, the occupants of academia and the public sector are not the peer group. Therefore, they could be safely ignored. Until up to now that is.

Not surprisingly, insurance has been the first industry within the private sector to grasp the extent of the problems we face. The insurer Lloyds of London wrote the following in their 360 Risk Project report:

A growing body of expert opinion now agrees that the climate is changing – and that human activity is playing a major role. Most worryingly, the latest science suggests that future climate change may take place quicker than previously expected.

The major reinsurance companies Munich Re and Swiss Re are also unequivocal over their perception of a threat. Here is Swiss Re:

Today, global warming is a fact. Since the beginning of industrialisation and the rapid growth of world population, man’s activities – along with natural variability – have contributed to a change of climate manifesting itself as a considerable increase in global temperature. Climate change has the potential to develop into our planet’s greatest environmental challenge of the 21st century.

Likewise, here is Nikolaus von Bomhard, the head of Munich Re, after the Copenhagen talks:

Climate change is a fact, and it is almost entirely made by man. It is jointly responsible for the rise in severe weather-related natural disasters, since the weather machine is “running in top gear”. The figures speak for themselves: according to data gathered by Munich Re, weather-related natural catastrophes have produced US$ 1,600bn in total losses since 1980, and climate change is definitely a significant contributing factor. We assume that the annual loss amount attributable to climate change is already in the low double-digit billion euro range. And the figure is bound to rise dramatically in future.

The position of the insurers is very important. These are private-sector companies operating within free markets. The consensus within this quintessentially capitalist sector is that a) climate change is happening, b) it is already causing considerable economic disruption and c) the economic disruption is set to get a lot worse. With this in mind, I believe any decision-maker within a large corporation should heed these words from von Bomhard in a Der Spiegel interview:

When it comes to climate change, we face a possible situation where individuals and companies might not be able to insure themselves anymore because the risks are getting too big and the necessary premiums are getting too expensive. And that’s why we need to do everything we can to confine global warming to the oft-quoted 2 degrees Celsius (3.6 degrees Fahrenheit).

Which takes me back to PWC’s Low Carbon Economy Index (LCEI) report, whose main message is that we are not going to hit 2 degrees.

The key metric within LCCE report is carbon intensity; that is, the amount of carbon emitted per unit of GDP. The chart below outlines the trajectory we should be following for carbon intensity to keep the global mean temperature rise below 2 degrees Celsius and the trajectory we are actually following (click for larger image):

When the first LCCI report was published by PWC in 2008, a reduction in carbon intensity of 3.7% per annum was required through to 2050. For every year missed, the per annum requirement grows:

Since 2000, the rate of decarbonisation has averaged 0.8% globally, a fraction of the required reduction. From 2010 to 2011, global carbon intensity continued this trend, falling by just 0.7%. Because of this slow start, global carbon intensity now needs to be cut by an average of 5.1% a year from now to 2050.

The required decarbonisation per annum rate has now grown so high that PWC explicitly states it has become unattainable:

The decarbonisation rate required for a 2°C world has not been achieved in a single year since World War 2. The closest the world came to that rate of decarbonisation was during the severe recessions of the late 1970s/early 1980s (4.9% in 1981) and the late 1990s (4.2% in 1999).

The upshot of all this is that we are facing increasing degrees of risk. In PWC’s words:

Governments and businesses can no longer assume that a 2°C warming world is the default scenario. Any investment in long-term assets or infrastructure, particularly in coastal or low-lying regions, needs to address more pessimistic scenarios. Sectors dependent on food, water, energy or ecosystem services need to scrutinise the resilience and viability of their supply chains.

And:

Either way, business-as-usual is not an option.

By extension, I would say this to any employee of a large multinational corporation: You may not wish to listen to academia, but then listen to what your peer group in the catastrophe and strategic risk business in the private sector is saying.

Also please note: “Governments and businesses can no longer assume that a 2°C warming world is the default scenario” implicitly means “Individuals can no longer assume that a 2°C warming world is the default scenario”.

If 2°C is not the default scenario, then you need to think about a 3°C, 4°C or even 5°C plus warming. As the heat gets higher, the life paths of you and your kids will be transformed. So stand up, get angry, do something. A call to the barricades.